Saturday, March 21, 2009


Since the economic turmoil at the end of 2008, it is common to hear that free-markets have failed, or that deregulation was the culprit. This is code for now it's time to stop putting it off and really try out Socialism. Nevermind that regulations grew and multiplied over the preceeding decade, that the financial sector is the most heavily regulated area in our economy, and that it is difficult if not impossible to find a single regulation in that sector that was repealed in the last eight years, or that it is laughable to claim that we currently have 'free-markets'.

The financial sector has come to be the most regulated portion of the US economy, and it is a sector where we've had 'price controls' in place for a very long time. When the Federal Reserve sets the interest rate, it is attempting to set the price of credit. Just as price controls on goods can play havok with the markets, an interest rate set lower than where the free-market would have set it leads to an eventual crisis. This has most recently taken the form of credit-induced bubbles, such as the dot-com bubble and the housing bubble. It also has many other effects, such as discouraging savings due to low interest income on savings, and a net loss of value of any savings due to the higher inflation that accompanies the Fed's manipulations, which tends to push savings into higher-risk investments in search of returns high enough to offset inflation.

When something so fundamental to our economy is controlled to such a degree, it is utterly innacurate to say that 'free-markets' are at fault for our recent troubles (or for the catastrophe now looming in 2009). Instead, it is more accurate to say the central planning of the Federal Reserve and the government is to blame.

Even in times of economic growth, we hear it stated that the poor would be better off if the greedy free-marketeers weren't making so much profit, or some such silliness. The speaker usually makes some appeal to morals or lack thereof in the argument, such as that failing to help the poorest in society, usually by taking resources from its current owner and handing them to a 'poor' person, is immoral, or that the desire to turn a profit, characterized as greed, is evil.

Paul A. Cleveland began in an article called Economic Liberty:

It is the conviction of many economists that economic liberty is essential to human progress. However, such freedom is often viewed negatively by moralists who tend to regard such liberty as a license to oppress the poor. The conflict between these views has resulted in a great deal of political debate as various actions struggle to implement policies consistent with their different visions of the world. Is there a perspective that can reconcile the establishment of economic liberty within the framework of morality?
It's a good article that quotes a lot of Bastiat, but I would like skip to the end where he quotes J. Gresham Machen, a Presbyterian theologian of the early twentieth-century, which I will simply paraphrase here: It never occurs to our legislatures that, though welfare, the helping of our fellow brothers and sisters, is good, forced welfare, the confiscation of resources, without our consent and effectively at gunpoint, in the cause of assisting our fellow brothers and sisters, may be bad.

What is the point of being moral with respect to the poor, when it is done with other people's money that was obtained by what can only be characterized as simple robbery.

Some question why there should be any poor at all. Besides the now obvious fact that poverty is always defined as the state in which the lowest class in our society exists, regardless of how wealthy that existence is, one might also point out that it is the natural human condition.

Jonah Greenburg wrote:

People ask, “Why is there poverty in the world?” It’s a silly question. Poverty is the default human condition. It is the factory preset of this mortal coil. As individuals and as a species, we are born naked and penniless, bereft of skills or possessions. Likewise, in his civilizational infancy man was poor, in every sense. He lived in ignorance, filth, hunger, and pain, and he died very young, either by violence or disease.

The interesting question isn’t “Why is there poverty?” It’s “Why is there wealth?” Or: “Why is there prosperity here but not there?”

At the end of the day, the first answer is capitalism, rightly understood. That is to say: free markets, private property, the spirit of entrepreneurialism and the conviction that the fruits of your labors are your own."

As I've grown in my understanding of economics, I've been led to draw a conclusion: greater liberty will always lead to greater prosperity and a greater average standard of living within that society.

Libertynomics is a journal of my explorations of this theme.